Bank failures will likely cost the insurance deposit fund around $100 billion over the next four years, prompting the FDIC board to vote Tuesday to require banks to prepay $45 billion in premiums. The fund is expected to run a deficit starting Wednesday.

MELISSA BLOCK, host:

The Federal Deposit Insurance Corporation acknowledged today that its insurance fund is close to running out of cash. That's because bank failures continue to mount. The insurance fund pays off depositors when a bank goes under. The FDIC board is proposing a solution: The nation's banks should pay the next three years' worth of premiums to the FDIC in advance - a total of $45 billion.

And NPR's John Ydstie joins us to explain.

And, John, let's start with this: If the FDIC fund is this close to running out of cash, should Americans who have money in banks be worried that their deposits would be lost if those banks fail?

JOHN YDSTIE: The answer is no.

BLOCK: Good.

YDSTIE: First, the FDIC has already set aside reserves to handle the most immediate bank failures that it anticipates over the coming months. And second, the FDIC has $100 billion line of credit at the Treasury Department and could borrow $400 billion more with the approval of the Treasury secretary and the Fed. So as FDIC chairwoman Sheila Bair said today, we have tons of money to protect insured depositors.

BLOCK: So if they have the tons of money that she's talking about, why does the FDIC want to force banks to make this huge prepayment, $45 billion?

YDSTIE: Well, they don't want to go to the Treasury because of bailout fatigue, according to Sheila Bair. And in fact, the industry itself is concerned about being seen as getting another bailout.

So this is actually a plan that the industry is behind, even though the big prepayment would be a bit of a shocker, according to one industry official. But the FDIC is allowing banks to expense the prepayment over time. On the bank's books, it will basically look like they're paying the premiums on the regular schedule over the next three years to ease the pain. And I might add that banks that are concerned the big prepayment would seriously weaken them can ask for an exemption.

BLOCK: Now, what about on the lending side, John, will this $45 billion prepayment make it harder for banks to lend and help the economy recover?

YDSTIE: Well, at the margins it's probably true. It may cut some lending, but although there are a lot of weak banks, there are far more healthy banks and those banks have lots of money that isn't being lent. Banks keep their excess money on deposit at the Federal Reserve and right now there are over $800 billion in excess bank reserves there. So the $45 billion banks who pay to bolster the FDIC insurance fund is only a small portion of the money they have available to make loans.

BLOCK: Why is there so much money on the sidelines, and why aren't the banks lending more of it out?

YDSTIE: Well, it's a combination of lack of demand for loans because in this very difficult economic situation, businesses aren't expanding. On the other side, banks are being extra careful about who they lend to, way too careful, according to some of their customers who want money but can't get it.

BLOCK: John, how big are the fees the banks pay into this insurance fund?

YDSTIE: Well, it's currently in the range of 12 to 16 cents on every hundred dollars of deposits that they hold. But today, the FDIC also proposed adding an additional three cents to that fee in 2011, something the banks aren't particularly happy about. This proposed rule won't go into effect until after a 30-day comment period. So there still could be some adjustments.

BLOCK: And if those fees are increased, would the insurance fund be out of the woods?

YDSTIE: Well, this week the FDIC revised the total cost of bank failures it expects through 2013 up from $70 billion to $100 billion. So we'll just have to see if this is enough.

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